Chrysler must recall trucks to avoid emissions lawsuit

U.S. Justice Department levels demand for Ram and Jeep recall and fine over diesel emissions cheating

Jeep logos photographer at a dealership in Turin, Italy in August 2017.Marco Bertorello

The U.S. Justice Department has offered to settle its emissions-cheating lawsuit against Fiat Chrysler Automobiles NV if the automaker recalls 104,000 vehicles and pays a substantial but unspecified civil penalty.

The proposed framework of an offer was extended to the Italian-American car company late January and included steps it would have to take to mitigate its past pollution and make internal changes to prevent future violations of environmental rules, according to a copy of the settlement offer obtained by Bloomberg News.

The settlement “must include very substantial civil penalties” large enough to deter future violations and that “adequately reflect the seriousness of the conduct that led to these violations,” Justice Department lawyers wrote in a Jan. 27 letter to Fiat Chrysler attorneys. Spokesmen for the company didn’t respond to a request for comment.

Reaching a final settlement would resolve civil violations of clean-air regulations laid out in a complaint filed May 23. The Justice Department said Fiat Chrysler had used illegal software to pass laboratory emissions tests while permitting its diesel vehicles to exceed pollution standards while on the road. The proposed settlement doesn’t include an end to a criminal investigation into the automaker by the Justice Department related to diesel emissions.

The civil complaint was filed in federal court on behalf of the Environmental Protection Agency and the California Air Resources Board and alleged violations of the Clean Air Act. “We are engaging in conversations but I’m not involved in the settlement talks,” Mary Nichols, chair of the California Air Resources Board, said early February at a Bloomberg New Energy Finance event in Palo Alto. “It’s interesting that Fiat Chrysler has the same team of lawyers representing them that worked with VW.”

Fiat Chrysler has acknowledged in a term sheet the company earlier submitted to the government lawyers the need for a settlement to include civil penalties, an emissions fix for the diesel vehicles and environmental mitigation efforts, the letter said. Fiat Chrysler proposed committing to projects to promote low- or zero-emissions “mobility projects” in the December term sheet, which the Justice Department said regulators would be willing to consider.

But, the letter cautioned, such projects are not the same as penalties and the government believes a “very substantial civil penalty payment is an essential element” of any deal to resolve the case. The parties have not yet discussed the value of any fines, according to a person familiar with the talks.

A recall would have to bring all its vehicles into full compliance with emissions standards, the letter said. The case involves diesel-powered Jeep Grand Cherokee SUVs and Ram 1500 pickups from model years 2014 through 2016 that regulators allege were sold with emission software that violated U.S. clean-air rules.

The case followed one filed in late 2015 against Volkswagen AG. That case touched off the biggest scandal in modern automotive history when Volkswagen admitted that about 11 million diesel cars worldwide were outfitted with so-called “defeat devices” – embedded algorithms used to game emissions tests. VW’s costs from the scandal has reached $31 billion in fines and related elements. Fiat Chrysler would likely pay less because Clean Air Act violations are assessed on the number of vehicles affected. VW admitted to rigging more than 500,000 cars in the U.S. – five times the number Fiat Chrysler is alleged to have cheated with – and did so over a longer period of time. And unlike in the Volkswagen settlement, the terms under discussion do not include a requirement to buy back any vehicles.

The issue could cost Fiat Chrysler between $460 million and more than $1 billion, according to estimates last year by Barclays Plc, Mediobanca SpA and Evercore ISI. In December, Sergio Marchionne, the company’s chief executive, said he anticipated “manageable costs” from the diesel issue.

Unlike Volkswagen, Fiat Chrysler has steadfastly denied intentional wrongdoing. Marchionne said he was outraged when the EPA brought its initial notice of violation against the automaker last year, calling the allegations “unadulterated hogwash.” The settlement letter cites “compelling evidence” that Fiat Chrysler knew or had reason to know that the vehicles did not comply with clean-air rules and that the company misled regulators, calling the conduct “egregious.”